Combined Insurance Company of America (CICA), Re

The court considered an application for directions under Part VII of the Financial Services and Markets Act 2000 in relation to a proposed transfer scheme by CICA UK. The sole disputed issue was whether the Applicants should be directed to give individual notice of the application to a class of former policyholders who might be affected by an ongoing Past Business Review (PBR).

The judge held that neither FSMA 2000 nor the Regulations made under section 108 expressly required notice to former policyholders, although the court had power to direct such notice. The court weighed competing factors: the likely limited practical benefit to former policyholders from individual notices, the risk of consumer confusion and false hope given the PBR was incomplete, substantial notification costs (estimated at c. £285,000), and the safeguards already available (notification to current policyholders, the draft scheme report, reports of the independent expert and the Financial Services Authority, and the parties' undertakings).

Balancing these matters the court concluded that the benefit of individual notification to the former policyholders and any resulting benefit to the independent expert, the FSA and the court was insubstantial and therefore refused the FSA's request. The court gave the other agreed directions and left outstanding drafting points about the form of notices to be resolved between the parties or by further application.

Background and nature of the application.

• The application was a joint directions hearing under Part VII FSMA 2000 for a scheme transferring CICA UK’s general insurance business to AEGL and long term business to AELL.
• The Financial Services Authority and the Applicants agreed most relaxations of the Regulations but disagreed whether certain former policyholders should receive individual notice of the Part VII application; the FSA sought a direction requiring such notice.

Facts and procedural posture.

• Between 1 April 2008 and 26 October 2010 CICA UK sold predominantly accident and sickness retail products via self-employed advised agents. CICA UK had regulatory failings identified by the FSA and was fined following enforcement action.
• Because of regulatory failings CICA UK agreed to conduct a PBR to identify customer detriment and provide redress; the PBR would be conducted in phases and would not be complete by the time of the final sanction hearing for the scheme.
• Approximately 290,000 former policyholders might be relevant to the PBR; the scale of potential redress was unknown.

Issues framed by the court.

1. Whether the court should direct the Applicants to give individual notice of the Part VII application to former policyholders potentially affected by the PBR.

Submissions and court reasoning.

• The Applicants submitted the Regulations (Regulation 3(2)(b)) refer to "policyholders" as defined in the relevant Order and do not extend to these former policyholders; they accepted former policyholders may later be heard under FSMA 2000 section 110 if they allege adverse effect, and offered undertakings and alternative measures (advertising, ad hoc contact, post-transfer notification and PBR-driven notification) to protect former policyholders.
• The FSA argued former policyholders have a real interest because liabilities to them will be transferred under the scheme, the PBR may identify significant redress, former policyholders are often unsophisticated and unlikely to react to general advertisements, and the cost of targeted notification was proportionate in the circumstances.
• The court held it had power to direct individual notification but must balance the likely benefit against disadvantages: very limited practical benefit given the PBR is incomplete, risk of confusion and false hope, likely low engagement by the unsophisticated former policyholders, and the cost and administrative burden. The court also relied on existing safeguards: the draft scheme report, the independent expert and the FSA’s supervision and the fact current policyholders would be individually notified.

Decision and wider comment.

• The court refused to direct the Applicants to give individual notice to former policyholders but granted the other directions discussed at the hearing.
• The judge noted the FSA has on occasion sought additional notification in other transfers but such requests have usually been resolved without a contested directions hearing; the issue may arise again in future cases.

The court granted the agreed directions under Part VII FSMA 2000 but refused the FSA’s specific request to direct individual notification to the class of former policyholders. The judge reasoned that the Regulations did not require such notice and, on a proportionality and cost-benefit analysis (taking into account the incomplete status of the PBR, the risk of confusion, likely low engagement by unsophisticated former policyholders, and existing safeguards including the draft scheme report and oversight by the independent expert and the FSA), the benefit of requiring individual notification was insubstantial and did not justify the expense and potential disadvantages.